 Alternatives
to walking away from a mortgage
|
 Dear
Debt Adviser,
I have a home valued at $140,000, but I owe approximately $160,000.
I have a first mortgage of $121,000 and a second at $38,500. My
wife and I are both over 50. We want to sell or get rid of the house.
We don't know what to do. Should we just walk away from it, let
them foreclose or file bankruptcy? We want to move to Arizona where
our children live and work. We are not proud of this situation,
but we need to do something. Thank you for any advice you can give.
-- David
 Dear
David,
I'm so sorry about your situation. As someone
in your age bracket, I know how big these financial bumps can be
in midlife planning. Still, it's never too late, so let's look at
your options.
Many people have taken advantage of the seemingly
endless increases in home values by taking out home equity loans
and lines of credit. For those who overdid it and used up all their
equity, or worse borrowed up to their limit with high loan-to-value
loans, or negative amortizing mortgages, many could be facing situations
similar to your own if housing prices fall or are flat in their
areas.
You are currently about $20,000 short of what it would
take to pay off your mortgage and second mortgage. However, you
might not be able to sell your home for its current value of $140,000;
you might have to sell for less. Plus, you may have sales-commission
fees and other costs associated with the sale, which will mean the
amount you owe and the amount you receive are farther apart than
you thought.
Walking away is never a good idea for any type of
loan. You would still owe the balance on the loan plus fees you
won't believe. If the bank sells the house you might not like the
sales price, and your deficit may be much larger than you think.
You didn't mention why you must move, only that you
need to do something. If your reason really is just a "want,"
then I suggest to set up a plan under which you will increase your
income or reduce your expenses until you can come up with the mortgage
deficit. If you really "need" to move, then you might
consider very carefully renting the house. Although not ideal, this
might buy you some time for saving the $20,000 or for home values
to increase in your area. With the right people in your home and
a little luck, you may be able to ride out the storm.
If home values in your area are going down and you
don't expect the area to improve or think it might decline, you
might decide it would be better to get out now. If that is the case,
you will need to communicate with your lender to let it know that
you want out of your mortgage. Your lender might accept a Deed in
Lieu of foreclosure, or DIL, which means you would surrender the
title to the lender and the lender agrees not to pursue you for
the balance owed after the sale of the home. Keep in mind that lenders
will usually only agree to a DIL if they believe foreclosure is
the only alternative.
Another option is what is called a short sale, where
you sell the home at a price acceptable to the lender and the lender
agrees to accept the sale price as satisfaction of the mortgage
loan. Lenders usually only agree to a short sale if the borrower
can document some type of financial problem such as job loss, job
transfer or illness.
Depending on your income and assets, you might qualify
for Chapter 7 bankruptcy status where your home loan balance could
be liquidated. You might want to check with an attorney who does
a lot of bankruptcies (as opposed to a real estate attorney) to
find out about options.
Whatever you decide to do, be sure you understand
the long-term consequences of your actions, including the affect
of your choice on your family situation. There is more than money
at stake here, your self-image and how your wife and kids see you,
might come into play as well.
Good luck!
The
Debt Adviser, Steve Bucci, is the president of Money Management International
Financial Education Foundation and the author of Credit
Repair Kit for Dummies. Visit MMI
for additional debt advice or to ask a question of the Debt Adviser go to the "Ask the Experts," page
to ask a debt question. | 
